Startup valuation is a technical procedure whereby the investors find an amount of money that market is ready to pay for a business. For an entrepreneur, it is vital to know the process of startup valuation and what makes a startup highly investable, so they can pitch the investors rightly.
Startup valuation is a bit different than that of valuation of a mature company as startups involve more uncertainty and higher risk while having potentially outsized returns. So, a startup’s financial data is important, but along with financial status, you must also consider the other qualitative and quantitative aspects of your business.
How to Value A Startup
How do startup valuations work?
This article will discuss all those factors that investors consider to determine the value of a startup.
1- The Idea:
The first thing investors look for in a startup is the idea behind the business model. There are hundreds of lucrative small business ideas, but not all of them are attractive for startup investors. So, to make it convincing for the investor, you must identify the problem that your startup solves and explain how exactly it does so.
2- The Market Size:
In market size, the investor actually sees the opportunity. The bigger the market size you have, the faster investor will credit the amount. However, money should also come faster, if your product is highly valuable to a smaller segment, but has a high demand. In other cases, if it’s one of the best business ideas, but your numbers are not impressive in terms of initial customer acquisition, the investor will take the time or you may also get an instant rejection.
How many competitors there are and where do they stand. Why should the investor invest in a startup owned by you and not in your competitor’s! How tough the competition would be in one year, five years, and so on.
This is to be dealt with strategically in your business plan, i.e. you must figure out the competitive advantage first and then mention it explicitly in your business plan.
4-The Stage of Development:
The development stage of a startup is important for investors, and this is the part where they spend more time doing due diligence before investing in a startup. Maybe, no one is interested when it was in ideation, but as soon as you got a beta product, it starts attracting attention. Analysis of the development stage, startup growth strategy, partnerships in place, resources, partnership, and funds needed must be the part of the business plan that you will use to pitch the investors.
5- The Team:
Yes, it matters for the investors. They do consider the potential and achievements of the team. After all, they want to be sure that their money is in the right hands. So, make sure to include an impressive startup team section in the business plan for investors. If it’s the first venture of the team and no one has an achievement yet, you may include the details of your university projects, volunteer work or something where you gave back something to the community!
The Bottom Line:
The above-discussed elements are the crucial points that must be communicated clearly and effectively in the business plan, however, you may need to add more resources if you are targeting first-time startup investors.